The month that was…

By Unconventional Wisdom on 02/July/2019

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Sharemarkets around the world closed the month delivering the highest 6 month returns in several decades. The ASX was up 3.19% for the month taking the 6 month return to 17.22%, whilst the S&P 500 was up 6.89% for June and 17.35% for the 6 months, making it the best half year since 1997. The Australian market was once again driven by the banking and financial sector (+3.49%) with materials and mining (6.28%) and industrials (4.47%) where most of our technology facing companies operate.

Looking around the world, most of Europe gained at least 5%, lead by the French CAC 40, which was up 6.36% for the month. The Chinese sharemarket began bucking the trade war trend, the Hang Seng was up 5.4% and the CSI 30, 6.1%. June saw a number of highly successful IPO’s and the return to favor of the all-important semi-conductor industry on both sides of the world. In a sign that the rally may continue into the second half unabated, President Trump conceded ground with China at the G20 meeting, relenting on the US ban on sales to Huawei and reopening trade discussions as anticipated.

Gold bullion reach an all-time high in June, hitting over $2,000 per once in Australian Dollar terms. This oft understood investments works as both an alternative currency and a hedge against volatility. It underperformed in the previous period of expansion as the central banks embarked on unconventional monetary policy. But the threat of falling rates around the world at a time of slower global growth has seen central banks and investors rush back into the commodity. That and the falling AUD have supported the price and made it one of the best performing assets in 2019.

The US trade re-negotiation continued in June, with India and Mexico brought into focus. The US removed India’s preferential trade status and their exemption from steel and aluminum imports, with India retaliating by imposing tariffs of up to 70% on 28 US products including almonds and apples. The US and Mexico came to an agreement to avoid the commencement of tariffs, with Mexico agreeing to do more in an effort to slow the flow of immigrants moving through its country.

After some 3,156 days of planning and assessments the Adani coalmine finally received environmental approvals with construction to commence as soon as possible. Interestingly, it came in the same week that AGL Energy announced it’s partnering with Santos to more efficiently extract oil and gas from the ground.

Evans Dixon was in the news for all the wrong reasons during the month after a claim to the Financial Ombudsman Service was shared with the Australian Financial Review. The complaint was focused around Dixon’s strategy of recommending their own in-house products to their clients, in some cases over 60% of their portfolio, and charging exorbitant fees. The focus was around the US Masters Residential Property Fund, which has reaped fees of over $200m from its investors, in addition to those paid to other Dixon subsidiaries for undertaking renovations on the fund’s properties. The firm which heavily advertises its low up-front cost service in the press, appears to be pushing the same vertical integration story that caused the banks and customers so much pain in the Royal Commission. With a potential class action on the cards we haven’t heard the last of this affair.

The Australian Dollar reached a 10 year low against the US dollar in June hitting as low as 67 cents in intraday trade. The downward pressure was due to a combination of factors, the first being the RBA’s first rate cut but the 13th in the current period of monetary loosening. This saw the 10-year Government bond rate fall to all-time lows under 1.3%. This suggests all is not well for the Australian economy as exports to China slow and we become more reliant on Government spending.

The weakness was evidenced by the GDP result for the first quarter, which came in at just 1.8%. this is a decade low and well below the 3.5% long-term average. Most weakness came from the private investment and consumption sector as property valuations, particularly on the fringes of our major cities remain under pressure and many developments are not securing enough presales to proceed. The highlight remains government spending and investment (read infrastructure) which is one of the few positives on the horizon and an area of interest for our clients.

In the worst kept secret in finance, Facebook announced it would be launching its own cryptocurrency with the support of a long line of financial and technology giants, including Visa, Mastercard, Ebay and Uber. It comes at an interesting time for the company following a number of data and privacy issues, and of course the opinions on the launch are mixed. There has been talk for many years that someone would challenge the world banking order and Facebook seemingly has the network, data and partners to make this a success.

We were exacerbated to hear the goings on at market darling Afterpay (APT). For those not aware, the company offers a lay-by service for online purchases and has been growing exponentially but is yet to deliver a profit. The company has been forced by ASIC to appoint an external auditor and are being investigated by AUSTRAC for their adherence with anti-money laundering laws. ASIC is concerned that the company is not suitably identifying it’s clients nor is it performing credit checks before lending, requiring as little as a prepaid Visa Card to purchase goods. Interestingly, the founders sold down $104m of shares before the announcement and the companies broker appears to be pressuring shareholders not to sell their own shares. On the final day of the year Visa announced the launch of its own copycat product sending shares down 10%.

The US and China agreed to resume trade talks ahead of the G20 meeting at the end of the financial year. This comes at an important time after the US began public hearings to discuss further tariffs on up to $300bn in additional exports. It’s estimated that consumer technology products would make up over half the additional amount slowing down the US’ innovation engine. This comes after the Chinese applied tariffs of between 10-25% on any $60bn worth of US exports and the US Government banned its own companies from selling to networking giant Huawei.

Looking globally, both the Japanese and European economies have shown signs of improvement, with Japanese GDP growing by 2.2% in the March quarter, as the consumer came back to the fore. European unemployment fell to a 10-and-a-half-year low of 7.6% in April as the German economy recovered and Italy moved out of another recession. This came at the same time as Theresa May stepped down as Prime Minister in the UK and more moderate parties gained traction in the EU election.

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